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Showdown on Debt at EU Summit

Hollande, Merkel differ on whether to use joint euro-area bonds.

Germany and France, the biggest euro economies, are headed for a showdown at tomorrow’s European Union summit over their views on how to stem a debt crisis that threatens the single currency’s survival.

German Chancellor Angela Merkel said she won’t shy away from disagreeing with French President Francois Hollande at the summit in Brussels over dinner at 7 p.m., the next major appointment of leaders seeking to allay concerns that Greece may quit the euro, putting Spain and Italy at risk as well.

Good cooperation “doesn’t exclude differing positions,” Merkel told reporters yesterday in Chicago during a meeting of the North Atlantic Treaty Organization. “These may very well arise in the context of the European discussions.”

While Franco-German collaboration has been a cornerstone of post-World War II policy making, Merkel and Hollande, France’s first Socialist president in almost two decades, have gotten off to a rocky start in a relationship that needs to work to spur economic growth and prevent Greece from leaving the euro area.

President Barack Obama, facing re-election in November, has prodded his European counterparts by highlighting the stakes. He hosted a Group of Eight meeting near Washington followed by the NATO summit in Chicago.

“What happens in Greece has an impact here in the United States,” Obama told reporters yesterday. “Businesses are more hesitant to invest if they see a lot of uncertainty looming across the Atlantic because they’re not sure whether that’s going to mean a further global slowdown.”

Euro’s Decline

The euro has lost 3.3 percent against the U.S. dollar this month and almost $4 trillion has been wiped from equity markets amid concerns over Greece.

Greece is preparing for June 17 elections, following an inconclusive May 6 ballot. Spain, which has the euro region’s third-largest budget shortfall, revised its 2011 deficit upward -- even as its borrowing costs approached levels that prompted bailouts in Greece, Ireland and Portugal.

Hollande has pledged to blunt the German-led austerity drive in Europe. He told reporters he wants to avoid conflict, though he intends to discuss joint euro-area bonds and put growth and stimulus spending at the heart of this week’s summit.

“Everything will be on the table,” he said. “All the tools, all the proposals will be welcomed and I am not preparing this informal summit with my government to create conflict.”

Acknowledging the topic’s sensitivity, he declined to discuss euro-wide bonds before the EU gathering of government heads “because I don’t want to anger anyone before we talk about it directly on Wednesday.”

In its semi-annual report, OECD Chief Economist Pier Carlo Padoan said Europe’s fiscal compact should be partnered by the issuance of jointly guaranteed bonds to help recapitalize banks and increase resources available to the European Investment Bank to fund infrastructure projects.

“Such moves could pave the way to a broader issuance of euro bonds,” Padoan said.

Merkel’s Isolation

No crisis solution can work without Merkel, who heads Europe’s largest economy. Germany contributes the most of any country to the EU’s financial backstops and bailouts for Greece, Ireland and Portugal.

“Germany is likely to insist that the highly indebted and uncompetitive economies most affected by the debt crisis continue to reduce public spending and implement structural reforms to make labor and product markets more flexible,” Martin Koehring, an economist at the Economist Intelligence Unit, wrote in a report today. “In the view of the German government, supported by the German central bank, the mutualisation of debt at this stage could create moral hazard.”

Merkel, whose approach to the crisis has helped make her Germany’s most popular politician before elections next year, faces growing pressure among G-8 leaders to ease up on her austerity-first policy after three years of the crisis.

U.K. Prime Minister David Cameron has urged European leaders to make contingency plans for a Greek exit from the euro and defended his right to speak about the dangers posed to the single currency, even if Britain isn’t part of it.

“This affects us -- 40 percent of Britain’s exports go to euro-zone countries,” Cameron told reporters in Chicago. “Staying silent on the problems would actually be more dangerous than speaking out.”

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